TO CASUAL OBSERVERS, earnings trades seem akin to a casino game, but they often follow a rather conservative script.

Stocks frequently make big moves after earnings are reported. The best options traders try to anticipate the market's reaction to profit news. They know that implied volatilities, the key to options prices, will rise steadily, while skew—the difference in implied volatility between at-the-money and out-of-the-money options—will steadily steepen as the earnings date approaches. The degree by which those adjustments occur is based on history. Stocks that have historically made significant post-earnings moves often have more expensive options.

When you trade options, it's important to understand how much you are paying, and there are two simple rules for gauging this: First, use the price of an at-the-money straddle, a short-term put and call whose strike price equals the stock price, to estimate how much dollar movement the market expects between now and expiration. Second, divide implied volatility by 16, the square root of the number of trading days in a year, to estimate the daily percentage move priced by the market. This is a far more relevant measure when outcomes are expected over short periods and your options will expire shortly.

Earnings risk is idiosyncratic, meaning that it is usually stock-specific and not easily hedged against an index or a similar stock. Stocks that are typically well-correlated may react quite differently, leading to share prices that diverge or indexes with dampened moves. For those reasons, no single strategy works in these situations. Traders must have very clear expectations for a stock's potential move and then decide on the most profitable combination of options.

If the market seems too sanguine about a company's earnings prospects, it's fairly simple (though often costly) to buy a straddle or an out-of the-money put and hope for a big move. Taking advantage of the opposite prospect, when front-month implied volatilities seem too high, can also be profitable. But it can be devastatingly expensive to be short naked options in the face of a big stock move. Traders can take advantage of high front-month volatility by buying a calendar spread–selling a front-month put and buying the same strike in the following month. The maximum profit potential is reached if the stock trades at the strike price, with the front-month option decaying far faster than the more expensive longer-term option. Losses are limited to the initial trade price.

To capitalize on this phenomenon, traders who are bearish can buy at-the-money puts while selling out-of-the-money ones. The purchaser defrays some of the cost of a high-priced option, but caps the trade's profits if the stock falls below the lower strike. And those who view the market as excessively bearish can sell an out-of-the-money put while buying an even lower-strike put, despite its higher volatility. They'd make money as long as the stock stays above the higher strike price. If it doesn't, they'd cap their loss at the difference between the two strikes.

Earnings season can be dangerous, but it can also provide a surfeit of opportunities for nimble options traders.